Manchester City Council

Capital and Reserves - an Explanation

Last Friday was Budget Council. It was a lively meeting with a fair few people exercising their right to protest but not I'm pleased to say in a way that interfered with the democratic process. There was a lot of debate at the end of which the Executive Budget proposals were approved with a number of amendments. The main amendment, that from the opposition was not passed, not least because senior officers advice to Council was that various parts of it were " unrealistic " and " unachievable ". In the meeting itself it was revealed that the proposed cut in spend on consultants was bigger than the spend on consultants - that doesn't quite add up.

However the main reason for this post isn't that but all the noise in the Twittersphere about various somes of money the Council could allegedly use to support its revenue i.e. service budget.

Let me first talk about the capital budget. The capital budget is essentially what we spend on fixed assets. That includes new buildings and major refurbishment of buildings, the acquisition of land or buildings, the acquisition of major plant, and investment in shares or bonds. The capital budget can be funded from the revenue budget, through borrowing ( within strict parameters set by government ), or from capital receipts. The Council can only borrow to support the capital budget i.e. it cannot borrow to pay for everyday services. Capital receipts i.e, the sale of assets can only be used to either repay debt or to support the Capital Budget.

So if for example we were to sell some or all of Manchester Airport Group, the money received would be a capital receipt and could only be used to redeem debt or for the capital budget. It could not be used to fund parks or libraries or other services. However, if we did sell all or part of the airport, that would reduce our annual dividend from the Airport, money we do use to support parks, libraries and other services. Redeeming debt might sound an attractive option except of course interest rates are now at an all time low and we have to pay significant penalties for paying off debt early.

Let me move on to reserves. Under the accounting rules the Council is required to operate under, any revenue monies not spent in the current year have to be accounted for as a reserve. So although it might appear that the Council has lots of reserves that isn't actually the case. I'm not going to go through all the reserves but hopefully enough to give a flavour.

It is often cheaper for the City Council to insure its own risks rather than take out insurance but it has to maintain a reserve to cover the risks it is self-insuring, the Insurance Fund. this is kept under regular review but in simple terms, the alternative to the insurance reserve would be much bigger annual insurance premiums. The HRA reserve can only be spent on local authority housing. The Capital Fund covers already committed capital projects, for example the three new swimming pools, where expenditure will fall in the next couple of years. The parking and bus lane reserve can only be spent the year after they have been accummulated and then only on transport, highways and related environmental items. The LMS reserve is the total of all the schools delegated budgets carried over to next year and can only be spent by the relevant schools.

I hope that's enough examples to give the picture. The only money that is not already committed in one way or another is the General Fund Reserve. That is there for crises and emergencies and our auditors require us to keep it at least around the current level i.e it isn't available to spend either. Just one other thing, reserves can only be spent once. So even if we could spend all these funds on current services, which we can't, it wouldn't prevent cuts, it would just delay them and for not very long.

If there are questions on this, will do my best to answer them.

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The blog of the leader of Manchester City Council, Councillor Richard Leese.

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